ALBERTUS MARAIS: Treasury introduces the ‘two-pot’ retirement system

On July 29 the National Treasury released its annual set of draft changes to SA’s tax acts. Significantly, the proposals mooted in this year’s Budget to introduce a so-called “Two Pot” retirement funds system are contained in it. In terms of the Two-Pot system retirement savings will be divided into two “pots”. One, the “savings pot”, will be accessible to individuals at any stage, with a second “retirement pot” available only at retirement.

This balanced approach will cater for early access to retirement savings (one-third) in emergencies, yet ensure at least a portion (a minimum of two-thirds) of retirement savings are kept separate and administered on an individual’s behalf until retirement occurs.

Ultimately, the need to encourage retirement and ensure that individuals have access to some financial means on retirement is essential to government as otherwise it will, by default, become burdened with looking after its citizenry financially when they are no longer able to work.

In recent years government has tried to discourage early withdrawals by introducing higher tax rates for premature savings withdrawals. However, both the SA Revenue Service (Sars) and the local retirement savings industry’s statistics indicate that this has done little to dissuade South Africans from accessing savings early.

During the Covid-19 pandemic it became apparent that in some instances limited access to retirement funds was necessary, though this should not apply to all savings.

The reality is that many South Africans have suffered significantly financially due to losing employment during the Covid-19 pandemic with no savings available other than those retirement funds. In such financial emergencies it does not make sense for the funds not to be made available to individuals who may be left desolate now, with significant retirement savings available only in years to come.

On the other hand, making all funds available to individuals who may be tempted to spend their savings prematurely even though it will be required later, is also not desirable.

The Two Pot system presents a pragmatic approach. It encourages retirement savings yet addresses certain realities such as that in a challenging financial environment some relief to individuals desperately needing it in times of emergency is necessary.

Note that five types of retirement savings funds are currently available in SA — pension funds, retirement annuity funds, provident funds, pension preservation funds and provident preservation funds. The need was identified in 2012 for the treatment of these funds to be aligned.

Previously, for example, savings in one type of fund could be accessed only when someone retired, while in others access was available when a person became unemployed. The result has led to undesirable consequences. Often, individuals are left financially desolate despite having significant retirement savings that are not accessible.

In other cases people would resign specifically to be able to access retirement savings in the short term, even though this was detrimental over the long term if new employment could not be found. To a large extent the treatment of these funds has now been aligned.

• Dr Marais is director: disputes & international tax at specialist tax and transaction advisers AJM.